Economist Nouriel Roubini shored up his reputation as a prophet of doom and offered a lot to worry about in the global economy in an almost contrapuntal interview with financier and philanthropist Michael Milken.
The two economics celebrities packed a large room on the final day of the Milken Institute Global Conference in Beverly Hills on Wednesday, and formed an odd couple of an optimistic Milken, who heads the economic think tank hosting the conference, and pessimistic Roubini, who heads a namesake economic consultancy.
Roubini identified the Middle East as a key source of trouble for the global economy in the near term, citing a risk of military confrontation between Israel or the U.S. with Iran. In addition, he said “the entire Middle East is a mess,” and warned “the Arab Spring is going to become an Arab Winter.” The result of all this instability is a continuing rise in oil prices that is spiking on the basis of a “fear premium” more than supply-demand fundamentals.
Optimist Milken responded with statistics about the opportunities stemming from vast oil and gas shale deposits, nearly all of which lie outside of the Middle East in politically stable places like the U.S. and Canada. In what became a theme of the session, Roubini poured cold water on the shale trend, saying it will take a long time, perhaps 20 years, before shale-based resources come on line in sufficient quantity to alter an energy landscape dependent on Mideast-based oil.
Shale boosters are “too optimistic,” Roubini said, noting the supply has outpaced demand, leading to a collapse in the price of natural gas. Milken said the fact of South Koreans paying eight times as much for a gallon of gas as Americans was a “wake-up call” to the private sector. But Roubini countered that prices alone were insufficient to boost demand. “Do we give subsidies to convert [infrastructure]?” he asked, noting it costs $50,000 per truck to convert to a natural-gas run system and $20,000 for a car, and the costs of converting gas stations across the country are even more substantial.
The U.S. talks a lot about revamping energy policy but takes few concrete actions, Roubini said, noting all the talk following the 1973-74 Arab oil embargo through the present-day discussions amid the war against the Libyan leader Muammar Gaddafi.
Another key challenge to the global economy identified by Roubini is the troubled euro zone, where he said peripheral Europe suffered from “reform and austerity fatigue” at precisely the time the euro zone’s core suffers from “bailout fatigue.”
This divergence promotes instability, he said, and he predicted “things will get worse rather than better” over the next 18 months, with Greece, Portugal and possibly other countries exiting the euro.
“Let’s differentiate between countries and companies,” Milken (left) retorted, citing statistics about the piles of cash corporations are sitting on, including Banco Santander, whose assets exceed the GDP of its country of origin, Spain. Milken added that corporate cash balances were high enough for companies to finance their customers and suppliers without the need to turn to weak financial institutions.
The trouble at the national level, Milken said, was that euro zone countries lacked the independence to devalue their currencies. For humorous effect, he handed Roubini a one-million lira coin from Italy’s postwar inflationary period, followed by a hundred-trillion Zimbabwean dollar note.
Roubini acknowledged the corporate sector was doing well. “But let’s think about the balance sheet of the rest of the economy,” he countered, noting that in the U.S. and Japan as well as Europe, household debt remains high. “One sector, corporate, is doing well,” he said. “All others are shaky.”
And while corporations are sitting on mountains of cash, they are not spending it amid economic and regulatory uncertainty, Roubini said. Moreover, since governments are in trouble, eventually they will have to boost taxation, and that will adversely affect growth in the corporate sector, he said.
Roubini called for “a massive real depreciation of the euro,” which he said was overvalued by about 30%. He called Germany “ubercompetitive,” and said deflationary trends in prices and wages will lead to depression, political instability and eventually a break-up of the euro zone.
The final topic of discussion and disagreement was the U.S. economy, where Milken was cheered by the performance of the stock market, which he said has increased in value by tens of trillions of dollars since 2008. Roubini countered that savers have gotten zero percent returns on Treasuries over the last 10 years, adding the average American must be thinking "How am I going to retire?" especially when “Social Security is bankrupt and corporate pension plans are totally unfunded.”
“My worry is that we have kicked the can down the road,” Roubini said. “Real wages are not growing; they’re flat and actually falling.” He also noted the “fiscal cliff” the U.S. faces if all the Bush-era tax cuts are allowed to expire, which he thought unlikely. Still, a likelier smaller withdrawal of stimulus will cut GDP growth in half, he said, sending the U.S. back to “stall speed” from its current lackluster 2% growth rate.
Roubini lamented the political gridlock in the U.S., saying even after November’s presidential elections, and regardless of who wins, the Republicans will have enough political strength to veto tax hikes and the Democrats will have enough power to veto any entitlement reform. He got the biggest laugh of the session when he asked, rhetorically, “Do you think the two parties will come together for the good of the country?”
Milken remained upbeat, praising the strength of U.S. financial institutions and detailing the promise of energy and health sector innovation and increased immigration. “The challenges are so well laid out,” he said, calling for U.S. leaders to inspire Americans, as Kennedy did, to ask themselves what they can do for their country.
Roubini was unimpressed, noting the U.S. is still growing beneath trend, unemployment is above 8% and growth is only 2% despite a surge in U.S. government spending from the stimulus. “We have to survive the short run to get to the bright spots in the long run,” Roubini told Milken.